The build-to-rent (BTR) offering has greatly shaped the UK housing market in the last few years, with a mixture of multi and single family homes – from luxury apartments to family townhouses. BTR has been helping housebuilders to address the UK’s shortage of homes – and its momentum shows no signs of slowing down.
The third quarter of 2023 witnessed a record 59,043 BTR homes under construction, with the number of completed BTR homes surging by 11%, according to Savills.
In a world where viability is a major factor when it comes to residential construction, BTR can fund housebuilders without exposing them to sales risks and rising debt costs. However, there is one major gap that most build-to-rent providers are failing to address.
Meeting growing demand
As BTR has grown in popularity, so has the trend of building high rise apartments in city centres, with luxury amenities. But this is only addressing a small proportion of the market. As millennials and Gen Z demographics enter the stage of life where they may wish to start or are continuing to grow their families, there is an increased demand for suburban family homes. This is particularly the case when considering the affordability of the for-sale market, where house prices are predicted to jump by around 3%, according to Knight Frank. The long waiting lists for our Simple Life homes is a strong indicator that the demand for quality housing has never been greater – particularly in a post-lockdown world, as people search for spaces they can work from their own home.
A shift in perception of the rental sector has also helped to drive this demand, with renting no longer a dirty word, particularly as the cost of buying continues to increase. Plus, with plenty of conversations ongoing in parliament with regards to the renter reform bill, now is a perfect time to really delve into how BTR can drive quality and standards for landlords.
But if we take a good look at other mature BTR markets around the world – how can the UK improve, and what learnings can we take? In Germany, the sector focuses on tenant satisfaction and stability, whereas in the US, the market has capitalised on a rising demand for rental properties where tenants wanted a high standard of service and created a whole new sub-sector of rent. It seems everyone across the globe has their own distinct approach to the world of BTR.
Germany: Smart renters benefiting from stricter regulation
If we take a closer look at the landscape in Germany, build-to-rent investment figures have accumulated to around €23bn over the last five years. Cities such as Berlin (which counts for 25% of these investments) are following a similar path to the UK in terms of multi-family apartments as their focus. But aside from this, the overall build-to-rent sector in Germany is very different to our approach in the UK. German BTR schemes are often basic and do not include any amenities, and one could argue that the specification is at an entry level as standard. The units are mainly regular, older apartments that include very basic infrastructures and services, such as parking.
The BTR sector in this country emphasises a tenant-centric approach, striving to enhance satisfaction and retention, with a professional service. A lot of the properties in the German BTR market are older, and it’s a very established market with low returns and stability, thanks in part to renting being the norm in the country, with just over half of the population in rental properties, therefore lowering expectations.
Germany’s renters are also known to be extremely savvy, and stricter regulations in the country have meant they are able to keep purse strings tightened. In Berlin, for example, landlords cannot extend rents beyond 10 per cent of the current rent index for their neighbourhood – a control that will remain firmly in place until 2025. This creates definite challenges for the sector as it constrains supply, meaning BTR landlords are unable to recoup finances by simply adjusting rents and bringing new tenants in. Instead, upgrades are offered to enable higher rent increases – such as a new kitchen.
USA: Creation of a new market, limited by geography
In the US, build-to-rent has been driven by demand and circumstance. Rather than stemming from investment, much of the BTR developments in this country began with an excess of stock from housebuilders, empowering landlords to acquire homes that were undergoing foreclosures, thus creating a brand-new market.
Without a doubt, BTR can deliver quality housing to cities and towns looking to change a traditional multifamily rental product. As a result, these communities can now be found across the US, in states such as Texas and Florida. The key differentiator between US and UK build-to-rent markets is that, rather than focusing on the luxury market, the US tends to create multi-family communities that integrate with existing neighbourhoods, and single family housing is a growing market.
Demand stems from the millennial generation – the largest population in the country. As this generation entered the renter pool following the 2008 recession, they are now entering their 30s and 40s, with desires space to grow their families. However, they ultimately find themselves largely unable to buy a home, due to rising living costs or paying off college loans. Challenges such as these have enabled the US BTR market to address the needs of the bulk of its main population by focusing on single family housing.
However, unlike UK build-to-rent, the US market is much more granular. In the UK, landlords can manage demand by moving tenants around if they lack space in a particular development. In the US, this limited by geography, making the management much more stagnant.
Global learnings are key
The UK’s build-to-rent market has undoubtedly made significant strides, with the third quarter of 2023 marking record-breaking construction numbers. Yet, as the sector continues to flourish, valuable insights can be gleaned from observing the diverse approaches adopted by other nations. Germany, with its emphasis on tenant satisfaction and stability, showcases a different model with basic amenities, but their learnings from managing a large portfolio of aging homes will be valuable to the UK. Meanwhile, the US has innovatively addressed the demand for family homes by acquiring single-family homes integrated into existing neighbourhoods.
While the UK market evolves and thrives, it is essential to draw upon the global landscape’s rich tapestry of strategies, adapting and refining approaches to meet the dynamic needs of renters and the broader housing market.
Rob Sumner, Residential Investment Director, Sigma Capital, written for React News